SBA 504 Loan Program

It is very common for small businesses to encounter difficulties when looking for long-term financing at affordable fixed interest rates. With this in mind, the U.S. Small Business Administration offers the 504 Loan Program, which provides small businesses a financing alternative. Our job is to originate, close and service the 504 loan.            

The 504 option is a partnership between a third party lender, CEN-TEX CDC and the business owner. Under the program, a bank or financial institution will lend up to 50% of the project cost, CEN-TEX CDC will lend up to 40% and the business owner generally provides a minimum of 10% of the project cost.

504 Benefits

The 504 Loan Program offers several benefits to the Business

• low down payment
• below market, fixed interest rates
• long-term financing
• loan fees may be financed
• loan is assumable

504 Cost

SBA 504 loan can finance the following items:

• land acquisitions and improvements
• construction of a new facility
• purchase/renovation of existing building
• purchase of equipment with a useful life of at lease 10 years
• payment of interest/fees on interim financing
• payment of soft cost related to the project (such as professional fees)

504 Eligible Businesses

• To qualify for an SBA 504 loan, the business must be for-profit with a net worth of less than $7 million, and have a two-year average net profit after taxes of less than $2.5 million.

• The business applicant must be the primary user of the facility (minimum 51% for existing facilities and 60% for new construction)

• Furthermore, the 504 loan requires that one new job be created/retained for every $35,000 provided by CEN-TEX CDC , unless the business meets other public policy goals.

• Passive investment companies, non-profit businesses, lending institutions, real estate development companies, and some other enterprises are not eligible for 504 loans.

  Call our office for more eligibility details.

504 Loan Structure

A loan made under the SBA 504 Loan Program contains the following three parts:

1. A First Mortgage Loan provided by the borrower’s financial lending institution, up to 50% of project cost. The private lender’s note is separate and carries its own rate, terms and conditions. The private lender charges a market rate for his loan with a minimum term of 10 years.
   
   
2. A Second Mortgage Loan from CEN-TEX CDC and SBA, up to 40% of project cost or a maximum of $1,000,000 (under special circumstances, up to $1,300,000 is available).  The term of the 504 loan can be as long as 20 years for real estate and 10 years for equipment. The interest rate is fixed for the maturity period. The interest rate is below market, fixed and determined at the time of SBA funding.
   
   
3. A down payment from the borrower, typically 10% of total project cost. If the business is a new business or the facility is for special usage, the required down payment may be as much as 20% of total project cost. The down payment can be cash, equity in land or building, existing equipment or any other fixed assets that are part of the project.

The 504 loan amount and the required equity contribution will depend on many credit and eligibility factors. Contact CEN-TEX CDC if you are uncertain about a specific project.

Project Sample

504 Collateral

The 504 loan is secured with a lien on project assets. In addition, personal guarantees of all principals owning more than 20% of the company are required. Life insurance is typically required unless there is a strong management succession plan. If credit is unusually risky, additional collateral may be required.

Borrower's Fees

Most of the up front fees associated with the 504 Loan Program are included in the loan. Processing fees total approximately 2.75% of the 504 share of the project, plus attorney fees (approximately $2500). All fees are generally added to the 504 loan. While these fees add to the borrower’s cost, the overall result is still a lower interest rate than normally obtainable through conventional financing.

Considerations

The bank loan generally can be prepaid according to terms negotiated between the bank and borrower. The SBA 504 loan may be prepaid, but it must be prepaid in full and there is a declining prepayment penalty during the first half of the term.